Davis,
RSF, and Meridian are the three largest shareholders in
Cyanotech Corporation-a company that produces natural
nutritional supplements made from microalgae. Davis acquired
19.6% of Cyanotech's outstanding common-stock shares in
2002, has served as a member of Cyanotech's Board since
2003, and has been Chairman of the Board since 2011. As of
March 17, 2017, Davis claims beneficial ownership of
approximately 16.8% of the outstanding common stock.

At some
point in 2011, another shareholder wanted to sell its 9.7%
interest in Cyanotech. When Davis got wind of the sale, he
donated an unprecedented $2.5 million to RSF, who used that
money to buy the shares. Then, by using one of his charitable
foundations as a vehicle, Davis transferred additional
Cyanotech shares to RSF while contemporaneously recouping his
own interest through the open market. As of March 17, 2017,
RSF holds 16.2% of the outstanding common stock. Davis and
RSF collectively own 33% of Cyanotech's outstanding
common stock; Meridian owns 13%.

Davis
had been reporting his ownership interest on short-form
Schedule 13G-a form reserved for passive investors and
unavailable to those seeking to control or influence the
issuer-instead of Schedule 13D-the standard long-disclosure
form for shareholders owning more than 5% of a company's
outstanding common stock. In response to Meridian's May
2016 demand, Cyanotech appointed a special committee to
investigate whether Davis was required to file a Schedule 13D
based on his significant ownership interest, position on the
Board, and relationship with RSF. Meridian filed its original
complaint against Davis and RSF one week after making the
demand, alleging, among other things, that Davis was
committing securities fraud and breaching his fiduciary
duties to Cyanotech by filing inaccurate Schedules 13G
instead of accurate Schedules 13D.[4] In September 2016, the
special committee released its findings, concluding that
“Davis should be filing his reports . . . under
Schedule 13D, rather than on the short form Schedule
13G.” On September 19, 2016, Meridian filed a verified,
first-amended complaint, incorporating the committee's
finding;[5] the next day, Davis filed a Schedule 13D.

Because
Meridian's first-amended complaint alleged that Davis had
not yet filed a Schedule 13D, I dismissed it as moot in light
of Davis's newly filed disclosure and gave Meridian leave
to amend.[6] Meridian filed a second-amended complaint,
this time alleging that Davis's 13D was inaccurate in at
least two respects: (1) he reported that he acquired his
shares for “investment purposes” instead of his
goal to exercise control and influence over Cyanotech; and
(2) he disclaimed that he and RSF were a group within Section
13(d)'s meaning.[7] On March 17, 2017, Davis and RSF filed a
joint, amended Schedule 13D identifying themselves-along with
Skywords Family Foundation[8]-as a group from that date.

The
parties then stipulated to give Meridian leave to amend its
complaint a third time to account for the amended Schedule
13D.[9]
In its third-amended complaint, Meridian alleges only two
violations of Section 13(d). First, Davis continues to
violate Section 13(d) by representing that he acquired his
interest in Cyanotech for “investment purposes”
rather than to exercise control and influence. Second, Davis
and RSF continue to violate Section 13(d), despite their
amended Schedule 13D, because they do not acknowledge that
they were a statutory group prior to March 17, 2017. Davis
and RSF now move to dismiss both claims.

Discussion

A.
Motion-to-dismiss standard

Federal
Rule of Civil Procedure 8 requires every complaint to contain
“[a] short and plain statement of the claim showing
that the pleader is entitled to relief.”[10] While Rule 8
does not require detailed factual allegations, the properly
pled claim must contain enough facts to “state a claim
to relief that is plausible on its face.”[11] This
“demands more than an unadorned,
the-defendant-unlawfully-harmed-me accusation”; the
facts alleged must raise the claim “above the
speculative level.”[12] In other words, a complaint
must make direct or inferential allegations about “all
the material elements necessary to sustain recovery under
some viable legal theory.”[13]District
courts employ a two-step approach when evaluating a
complaint's sufficiency on a Rule 12(b)(6) motion to
dismiss. First, the court must accept as true all well-pled
factual allegations in the complaint, recognizing that legal
conclusions are not entitled to the assumption of
truth.[14] Mere recitals of a claim's elements,
supported only by conclusory statements, are
insufficient.[15] Second, the court must consider whether
the well-pled factual allegations state a plausible claim for
relief.[16] A claim is facially plausible when the
complaint alleges facts that allow the court to draw a
reasonable inference that the defendant is liable for the
alleged misconduct.[17] A complaint that does not permit the
court to infer more than the mere possibility of misconduct
has “alleged-but not shown-that the pleader is entitled
to relief, ” and it must be dismissed.[18]

B.
Meridian has sufficiently pled a cause of action under
Section 13(d).

Davis
argues that Meridian's third-amended complaint should be
dismissed for four reasons: (1) Section 13(d) does not imply
a private cause of action outside the context of threatened
corporate takeover; (2) Meridian has not shown that it will
suffer irreparable harm without the requested injunctive
relief; (3) this lawsuit moots Meridian's second claim
because it provides shareholders with the information
required to make informed investment decisions and satisfies
Congress's intent in passing Section 13(d); and (4) the
allegations are insufficient to satisfy the Private
Securities Litigation Reform Act's (PSLRA) heightened
pleading requirement.[19] RSF incorporates Davis's
arguments into its own motion[20] and adds that public-policy
and equitable considerations of balancing the hardships do
not support the requested injunctive relief.[21]

1.
Meridian may pursue a private cause of action under Section
13(d) outside the context of a threatened
takeover.

“Congress
enacted Section 13(d) in 1968, in response to a sharp
increase in corporate takeover bids . . . to provide for full
disclosure in connection with cash tender offers and other
techniques for accumulating large blocks of equity securities
of publicly held companies.”[22]This “allows
investors to determine the value of the corporation's
securities more accurately and to make more informed
investment decisions.”[23]

Section
13(d) of the Exchange Act requires beneficial owners of more
than 5% of an outstanding class of registered securities to
file a disclosure statement on a long-form Schedule 13D or
short-form Schedule 13G.[24] A group of two or more persons formed
“for the purpose of acquiring, holding, or disposing of
securities of an issuer” stock is considered a single
beneficial owner under the statute.[25] The owner must disclose
information about its background and identity, the source of
the funds used to purchase the securities, the purpose of the
purchase, and the extent of the owner's holdings in the
target company.[26]

Section
13(d) does not expressly authorize a private right of action,
but the United States Supreme Court has recognized “the
power of federal courts to fashion private remedies for
securities laws violations when to do so is consistent with
the legislative scheme and necessary for the protection of
investors . . . .”[27] The Ninth Circuit “has held
that an issuer corporation has a private right of action for
injunctive relief under Section 13(d) of the Act. Because the
sole purpose of Section 13(d) is to protect shareholders,
however, the issuer corporation is deemed to act on the
shareholders' behalf in seeking injunctive relief until
an accurate Schedule 13D is filed.”[28]

The
Ninth Circuit has not yet extended that right to individual
shareholders, but the defendants do not dispute
Meridian's ability to bring this action as an individual
shareholder.[29]As a practical matter, the issuer is
likely in the best position to police its shareholders'
Schedules 13D and 13G because the Act requires the
disclosures to be filed with the issuer; it does not require
disclosure to the shareholders.[30] And if the Section's
whole purpose is to protect the shareholders by providing
them with complete and accurate information to assist them in
making informed investment decisions, an individual
shareholder should not be precluded from asserting a Section
13(d) claim.

Defendants
argue that courts recognize a right of action under Section
13(d) only when a cash tender offer or some other
“large, rapid aggregation or accumulation of
securities” threatens a change in corporate control,
[31]
and because they acquired their interests in Cyanotech years
ago, there is no current threatened change in control. So,
they contend, Meridian has the burden of establishing that it
can sue under Section 13(d) outside the context of a
threatened takeover.[32]

Meridian
responds that courts “have found a private right of
action to exist in multiple situations when necessary to
remedy an incorrect or incomplete filing of a Schedule
13D.”[33] It cites to Chevron Corp. v.
Pennzoil Co., [34]Dan River, Inc. v. Unitex Ltd.,
[35]
and GAF Corp. v. Milstein[36] for support. In
Chevron, the Ninth Circuit concluded that “a
reasonable inference could be drawn that Pennzoil's
[Schedule 13D] was materially misleading because it failed to
adequately disclose Pennzoil's intent to obtain a board
position and exert some level of management influence over
Chevron's operations.”[37] The court reversed the
district court's grant of summary judgment and remanded
the case so that Chevron could pursue its Section 13(d) claim
and seek curative injunctive relief for the allegedly
inaccurate disclosure.

The
Second Circuit held in Milstein that “the
obligation to file truthful statements is implicit
in the obligation to file with the issuer, and a
fortiori, the issuer has standing under Section 13(d) to
seek relief in the event of a false
filing.”[38] And in Dan River, the Fourth
Circuit-placing substantial weight on the holding in
Milstein-held that, “should Dan River
establish that there is a reasonable basis for concluding
that the Schedule 13D filed by the defendants is inaccurate,
incomplete, or misleading . . . the district court may and
should grant appropriate injunctive relief and should require
the filing of an amended Schedule 13D complying with the
requirement of a truthful and complete statement . . .
.”[39]

All of
these cases, however, arose in the context of an express or
alleged takeover attempt. So, they don't stand for the
proposition that a Section 13(d) action can be brought beyond
that context, but nor do they say that one can't be. What
I glean from these cases is their focus on the need for
truthful and complete Schedules 13D. This focus seems to
support a private right of action for curative injunctive
relief even after a change in control has occurred.

But
what I find most compelling is Meridian's common-sense
argument that to agree with Davis and RSF would be to
“eviscerate Section 13(d).” Davis and RSF argue
that they have collectively owned 33% of Cyanotech's
outstanding common stock for several years and currently
exercise actual control in light of Davis's position as
Chairman of the Board, so there can be no future threat of
usurpation from them. But Meridian alleges that they gained
their controlling share while they were in violation of
Section 13(d). Agreeing with the defendants, then, is
tantamount to saying: “If you violate Section 13(d)
long enough, you can't be sued under Section
13(d).” And this cannot be what Congress intended. So,
in light of the caselaw's focus on truth, accuracy, and
completeness, I find that Meridian may assert a private cause
of action under Section 13(d).

&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;2.
Meridian has sufficiently alleged that it will continue to
suffer irreparable harm ...

Our website includes the first part of the main text of the court's opinion.
To read the entire case, you must purchase the decision for download. With purchase,
you also receive any available docket numbers, case citations or footnotes, dissents
and concurrences that accompany the decision.
Docket numbers and/or citations allow you to research a case further or to use a case in a
legal proceeding. Footnotes (if any) include details of the court's decision. If the document contains a simple affirmation or denial without discussion,
there may not be additional text.

Buy This Entire Record For
$7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.